Key Takeaways

Strategic AI investments and acquisitions could boost growth if effectively differentiating products and integrating assets; failure may limit revenue and earnings projections.
Mitigating geopolitical risks and optimizing cost savings are crucial; failure may compress margins, impacting growth forecasts adversely.
Competitive pressures, tariffs, weak consumer demand, and geopolitical risks pose significant threats to HP's revenue growth and profit margins.

Catalysts

About HP

Provides personal computing, printing, 3D printing, hybrid work, gaming, and other related technologies in the United States and internationally.What are the underlying business or industry changes driving this perspective?

HP's focus on developing AI-powered PCs and integrating advanced software capabilities could drive future revenue growth, especially in the commercial segment. However, if this shift fails to significantly differentiate their product line, these investments might not generate the expected revenue uplift, suggesting lower growth projections in this area.
The strategic acquisition of assets from Humane aims to enhance HP's AI capabilities across devices. While this could potentially improve product offerings and margins if integration is successful, any delays or mishandling of the transition might lead to underwhelming earnings figures.
Realignment of key growth areas, excluding gaming, to focus on the Future of Work might improve HP's margins if the strategy aligns well with market demand. However, if consumer interest in gaming remains strong, this could represent a missed revenue opportunity, impacting projections negatively.
Tariff increases on Chinese products and potential geopolitical factors are accounted for, with HP strategizing to mitigate these with supply chain diversification and cost efficiency. If these measures are less effective than anticipated, the additional costs could compress margins more severely than forecasted.
Incremental structural cost savings are expected to bolster margins and support growth investments. Should these savings not materialize at the planned scale or pace, the expected EPS growth may not meet current forecasts, leading to downward adjustments in estimated future earnings.

HP Earnings and Revenue Growth

HP Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

This narrative explores a more pessimistic perspective on HP compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
The bearish analysts are assuming HP's revenue will decrease by 0.6% annually over the next 3 years.
The bearish analysts assume that profit margins will increase from 5.0% today to 5.3% in 3 years time.
The bearish analysts expect earnings to reach $2.9 billion (and earnings per share of $3.35) by about April 2028, up from $2.7 billion today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, up from 8.9x today. This future PE is lower than the current PE for the US Tech industry at 12.9x.
Analysts expect the number of shares outstanding to decline by 3.66% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 9.01%, as per the Simply Wall St company report.

HP Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

HP faces competitive pressure in both the Print and Personal Systems segments, particularly with pricing in China being very competitive. This could negatively affect their revenue and profit margins.
The imposition of tariffs, especially those related to China, could lead to increased costs for HP, impacting their net profit margins if not successfully mitigated.
HP’s consumer segment underperformed with revenue down 7% year-over-year, highlighting risks to revenue growth particularly if consumer demand remains weak or declines further.
The reliance on ongoing adjustments in the global supply chain and external geopolitical factors to mitigate risks could affect operational efficiency and future earnings if disruptions occur.
With rising commodity costs negatively impacting gross margins and the time required for cost reduction and pricing actions to fully offset these headwinds, there is a risk to achieving anticipated net earnings improvements.

Valuation

How have all the factors above been brought together to estimate a fair value?

The assumed bearish price target for HP is $28.27, which represents one standard deviation below the consensus price target of $32.35. This valuation is based on what can be assumed as the expectations of HP's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.0, and the most bearish reporting a price target of just $25.0.
In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $54.9 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 9.0%.
Given the current share price of $25.57, the bearish analyst price target of $28.27 is 9.6% higher.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

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